Uber, Lyft, and Others Struggle to Deal With California Labor Bill

In the battle for control of the gig economy, score one for the drivers.

This week, the California state senate voted 29-11 to approve AB5, a measure that requires gig economy companies like
Uber
(ticker: UBER),
Lyft
(LYFT), DoorDash and Postmates to treat their workers as employees, rather than contractors. The measure now goes back to the state assembly for a vote on the revised bill later this week, and then heads to California Governor Gavin Newsom, who supports the bill. Assuming no hiccups, the law takes effect Jan. 1.

As Barron’s reported in July, the AB5 bill codifies and clarifies a standard created in an April 2018 California Supreme Court decision known as the Dynamex case. That standard found that to classify a worker as a contractor, an employer has to pass three tests.

The worker must be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

The worker must perform work that is outside the usual course of the hiring entity’s business.

The worker must be engaged in an independently established trade, occupation, or business of the same nature as the work performed.

On the second point alone, the gig economy companies fail the test.

With AB5, drivers and delivery people would be protected by U.S. labor laws. The companies that employ them would have to pay Social Security and payroll taxes, unemployment insurance, and state employment taxes—while also providing workers’ compensation insurance, and complying with federal and state rules on minimum wages and working conditions. The new law would reportedly affect more than one million workers in California—and copycat legislation is in the works in other states.

For now, some high-profile companies—and their shareholders—are holding out hope that they can find a way around AB5.

The Wall Street Journal reports today that Gov. Newsom—who wrote a Labor Day op-ed in the Sacramento Bee endorsing the bill—continues to work with gig companies over the status of their workers. “As it relates to Uber, Lyft, DoorDash, others, some of the gig platforms, these remain ongoing negotiations, and regardless of what happens with AB5, I am committed, at least, to continuing those negotiations,” the governor told the Journal.

The new measure is a victory for drivers who have been advocating for better conditions, like the group Gig Workers Rising. “Uber and Lyft exclude rideshare drivers from basic worker protections,” the group says on its website. “Without these protections, drivers face low wages and labor abuses. They have no way to organize and are denied crucial benefits like health insurance, disability, overtime, or workers comp. Drivers face unsafe working conditions and no recourse when they’re deactivated.”

The measure was supported by most of the state’s labor unions. “California has set the stage for a major breakthrough for workers that are excluded from basic pay and protections no matter how hard they work,” the Service Employees International Union, which represents government workers, said in a tweet.

Originally written broadly to cover all contract workers, the state senate version of the bill was amended to carve out exemptions for a variety of worker groups, including insurance agents, broker-dealers, real estate salespeople, commercial fisherman, and barbers, among others.

The gig companies, while trying to craft a compromise with the governor, aren’t happy with the bill and are threatening further action. Lyft said in a statement that the company is “fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need.” Last month, Uber, Lyft, and DoorDash said they are prepared to spend $90 million on a ballot initiative that would exempt them from the new law.

In a call with media today, Uber Chief Legal Officer Tony West said that they have proposed a framework that would set a guaranteed minimum earning standard for drivers, bring them portable benefits, and provide them a voice in decisions about their working conditions. But he also said Uber’s view is that under the Dynamex standard drivers for the company meet the standard to be considered a contractor, since “drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”

In a statement Wednesday, DoorDash repeated its opposition to the law—and wants to see it modified before or after taking effect. “We’re disappointed that California lawmakers missed a major opportunity to create a groundbreaking approach that pairs the flexibility Dashers tell us they value most with the economic security they deserve,” the company said.

Postmates took a similar position, asserting that the sides should work together to find compromise. “As Governor Newsom acknowledged this morning, there is more work to do to protect the State’s 450,000 gig delivery workers,” the company said.

Investors knew—or should have known—that reclassification of drivers as employees was a possibility. The IPO filings for both Uber and Lyft called out reclassification as a risk to their businesses.

Lyft wrote in its S1 filing: “If the contractor classification of drivers that use our platform is challenged, there may be adverse business, financial, tax, legal and other consequences...We continue to maintain that drivers on our platform are independent contractors in such legal and administrative proceedings, but our arguments may ultimately be unsuccessful.”

“Our business would be adversely affected if drivers were classified as employees instead of independent contractors,” Uber said in its own S-1. “...any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.”

Wedbush analyst Daniel Ives wrote in a research note today that he thinks the state and the gig companies will eventually reach “a more middle-ground approach,” in part since the offset to better protections for drivers could be reduced hiring. He adds that higher costs would be offset by reducing the number of drivers, raising prices for consumers, imposing driver shifts, and other measures.

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